A Gold Standard Does Not Require Interest-Rate Targeting

Stephen Moore and Herman Cain, the two recent nominees to the Federal Reserve Board of Governors, have in the past suggested returning to a gold standard (although Moore now says he favors merely consulting a broad range of commodity prices as leading indicators). In response, a number of recent op-eds criticized the idea of reinstating a gold standard. The critics unfortunately show little theoretical understanding of the mechanisms by which a gold standard works, and consult no evidence about how the classical gold standard worked in practice.I don ’t seek to defend the nominees, who I think are poor choices on other grounds that have beenenumerated by Will Luther.  And I don’t seek here to answer many common criticisms of the gold standard, since I have tried to do thathere andhere. I want to focus on one novel criticism. It stems from imagining that a gold standard regime works like our present regime in the sense that the central bank uses a short-term interest-rate target to steer the economy toward its long-run goal. The only difference is that the central bank pursues a constant dollar price of gold rather than another nominal goal like a gradually rising price-level or nominal-income path.Thus a Washington Post reporter, Matt O ’Brien,declares that a gold standard is “a disaster” and “might be the worst guide to setting policy.” That he sees the gold standard as a “guide to setting policy” already signals a misconception. O’Brien comes to the “...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs